eco TV

EcoTV – December 2020

12/11/2020

TRANSCRIPT // EcoTV – December 2020 : December 2020

Hello and welcome to 2020’s last edition of EcoTV, the video magazine of BNP Paribas economists. Our chief economist William De Vijlder will take a look back at the pleasant surprises we had this year – yes, there were some – and consider some details of the outlook for 2021. In the Chart of the Month, Hubert de Barochez will examine the UK, where the Covid-19 crisis and Brexit are taking a toll on the economy. Lastly, three questions on Chile, where people have taken to the streets to demonstrate a number of times in the last year. Hélène Drouot will talk to us about Chile’s medium-term economic outlook.

 

FOCUS

FRANÇOIS DOUX

It’s time for an economic review of 2020, a year marked by a major exogenous shock, the Covid-19 pandemic.

William De Vijlder, hello.

WILLIAM DE VIJLDER

Hello François.

FRANÇOIS DOUX

We’re going to talk about pleasant surprises, because there have been some in 2020. From your point of view, what have they been?

WILLIAM DE VIJLDER

You’re right to say an exogenous shock, one arising outside the economy. The main positive surprise in 2020 has been the response of the scientific community, specifically in terms of vaccines. Who would have thought, when we started to analyse the consequences of the pandemic in early March that we’d be talking about a vaccine being rolled out before the end of the year?

FRANÇOIS DOUX

Presumably that’s a game-changer for the economy and good for confidence?

WILLIAM DE VIJLDER

It’s a game-changer because, without a vaccine, the economy would have continued along a path of a recovery, followed by a shutdown, followed by a recovery etc. The negative consequences of this would have built up over time: i’m thinking of unemployment, business bankruptcies and public-sector debt levels.

FRANÇOIS DOUX

But the other positive surprise in 2020 was the very aggressive and rapid response from central banks.

WILLIAM DE VIJLDER

Yes, the reaction was impressive. An extremely agile response was needed, but it’s still impressive for several reasons, especially the creativity that was shown. Creativity in the sense of being able to adapt to what was needed in the circumstances. In Europe, there was the ECB’s specific quantitative easing plan: the Pandemic Emergency Purchase Programme (PEPP), in which the ECB abandoned its traditional allocation keys. That was crucial in getting yield spreads to narrow massively, helping badly affected economies like Italy and Spain. In the US, the Federal Reserve was able to buy paper issued by companies, which gave them a real lifeline.

FRANÇOIS DOUX

Alongside monetary policy, there was also fiscal policy. Governments took on a lot of debt to support the economy, to support all economic agents.

WILLIAM DE VIJLDER

Absolutely. This was another case of agility, of fiscal prudence being cast aside. Again, it was necessary. But the real surprise was the recovery plan agreed in Europe, consisting partly of subsidies. A EUR 750 billion recovery plan would have been unimaginable at the end of 2019. But they’ve agreed it now, and that’s fantastic.

FRANÇOIS DOUX

As well as central banks and governments, companies and households also had to show agility and flexibility.

WILLIAM DE VIJLDER

That’s right. To illustrate that, there are two factors that come to mind. The first is obviously that many companies managed to let staff work remotely, from home. That was extremely important for them to continue producing, providing services, working etc. So that limited the economic shock, the downturn in output. The second factor was that businesses and retailers clearly made adjustments between the first and second lockdowns. That’s one of the reasons why the second lockdown had a much smaller economic impact than the first. Of course, the restrictions were different and less strict as well. China is also helping our exports. But the ability of companies and retailers to adjust also played an extremely important role.

FRANÇOIS DOUX

But we can’t forget the unpleasant surprises. We must remember the victims, the people and companies that did not survive.

WILLIAM DE VIJLDER

The job losses as well.

FRANÇOIS DOUX

Yes, the unemployment rate. Will these negative factors, these problems, be with us for the long term or not? That’s a big question.

WILLIAM DE VIJLDER

Let’s say that people want to look at 2021 with a degree of confidence. A lot of confidence, in fact, but at the same time, there’s the question of whether the recovery will end up being more sluggish, slower than expected, which would mean that we’re faced with the long-term issues and damage you mentioned. That’s the main unknown in 2021 in my view.

FRANÇOIS DOUX

But you’re also looking at high-frequency data. These are new economic indicators, introduced fairly recently. What are they telling you?

WILLIAM DE VIJLDER

Economists have had to adapt their analysis too. They needed to find indicators showing what’s happening almost in real time. One favourite indicator at the moment is Google Mobility, which shows that, during the second lockdown that has taken place in several European countries (including France), the worst is already behind us in economic terms. We can see that mobility and traffic levels are already improving to some extent, and December should be better than November. And then, obviously, the rebound will continue in January.

FRANÇOIS DOUX

In January: yes William, we’ll speak again in 2021 to review the situation as we enter the new year. Thank you. Now it’s time for the Chart of the Month, in which I’ll be talking to Hubert de Barochez about the economic situation in the UK.

 

CHART OF THE MONTH

FRANÇOIS DOUX

In this month’s Chart of the Month, we’re looking at the UK economy, which was hit hard at the start of the year. It suffered Europe’s second-largest recession, just behind Spain. Although it recovered in the third quarter, GDP remains 10% lower than at the end of 2019. Hubert de Barochez, hello.

HUBERT DE BAROCHEZ

Hello.

FRANÇOIS DOUX

How is the UK economy doing in the fourth quarter of 2020?

HUBERT DE BAROCHEZ

We’re clearly heading for another dip in GDP due to restrictions being reimposed, and particularly due to the four-week lockdown in England in November.

FRANÇOIS DOUX

What are your forecasts for 2021?

HUBERT DE BAROCHEZ

They largely depend on the Covid-19 situation. That’s also the opinion of the Office for Budget Responsibility (OBR), which provides independent forecasts to the Treasury. It’s drawn up three scenarios depending on how the Covid-19 crisis develops next year. The scenarios are based on the effectiveness of the test-trace-isolate system, when a vaccine will be widely available and whether another lockdown will be needed.

FRANÇOIS DOUX

The central scenario is on screen now. When will the economy recover to its pre-Covid level of late 2019?

HUBERT DE BAROCHEZ

That’s expected to happen in the fourth quarter of 2022.

FRANÇOIS DOUX

That’s the central scenario. But it involves other underlying assumptions.

HUBERT DE BAROCHEZ

Yes, it’s based on the very important assumption that the UK and the European Union will reach a free trade agreement. But as we speak that still hasn’t happened, which is why the OBR has also provided another set of forecasts, looking at the situation if those talks fail.

FRANÇOIS DOUX

In that case, what’s likely to happen in 2021?

HUBERT DE BAROCHEZ

GDP growth would be reduced by 2 percentage points next year, and would also be reduced by 2 points in the long term.

FRANÇOIS DOUX

A 2-point reduction in GDP for the UK. What are the underlying reasons for that?

HUBERT DE BAROCHEZ

That would mainly be due to border disruptions, lower investment, lower productivity, and an increase in structural unemployment. But it must be said that all of those things will happen even if the UK leaves with a deal. The UK is heading for a hard Brexit. It will leave the single market and, according to the OBR, this will cost the UK 4 points of GDP over the long term. In the end, although leaving without a deal would harm the UK economy, it’s leaving the single market that will have the biggest effect.

FRANÇOIS DOUX

Hubert de Barochez, thank you. Next up, three questions about Chile.

 

3 QUESTIONS

FRANÇOIS DOUX

Three questions about Chile, where major demonstrations started more than a year ago, in October 2019. Hélène Drouot, hello.

HÉLÈNE DROUOT

Hello.

FRANÇOIS DOUX

Chile’s people have made their voices heard, in the streets but also at the ballot box, in a referendum in October 2020. A new constitution must now be drafted. First question: what can we expect to happen now.

HÉLÈNE DROUOT

2021 will remain slightly tense in political terms because there will be discussions about the new constitution due to be drafted for 2022. Also, there will be debates in the run-up to the presidential election due at the end of the year. The first round will take place in November 2021.

FRANÇOIS DOUX

Second question: How is Chile doing economically in late 2020?

HÉLÈNE DROUOT

We are expecting Chile to suffer a serious recession in 2020, because its economy had already been weakened in the fourth quarter of 2019 by labour disputes and a general strike. The economy has also been hard hit by the Covid-19 crisis, despite huge support from the authorities: the government and central bank have made major and repeated efforts to keep the economy afloat. In 2021, we expect a gradual recovery rather than a rapid rebound. The authorities will continue to support domestic demand, but the upturn will be a gradual one.

FRANÇOIS DOUX

My third and final question: What are Chile’s medium-term prospects?

HÉLÈNE DROUOT

The outlook in terms of potential growth had already worsened in previous years, since the country has become less productive, particularly in the mining industry. However, the outlook remains positive. Chile’s fundamentals remain good. But there is the slight risk that investors will adopt a wait-and-see attitude, waiting to see the content of Chile’s new constitution and the economic proposals of the new government that will be elected in late 2021.

FRANÇOIS DOUX

Thank you Hélène Drouot for this update on the Chilean economy. And from me, on behalf of all BNP Paribas’ economic research teams, I wish you a very happy festive season.

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